FIRST DIVISION

[G.R. No. 149073. February 16, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU TOYO CORPORATION, respondent.

DECISION
FACTS:
Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various optical
components used in television sets, cameras, compact discs and other similar devices. Its principal office is located at the
Mactan Export Processing Zone (MEPZ) in Lapu-Lapu City, Cebu. It is a subsidiary of Toyo Lens Corporation, a non-
resident corporation organized under the laws of Japan. Respondent is a zone export enterprise registered with the
Philippine Economic Zone Authority (PEZA). It is also registered with the Bureau of Internal Revenue (BIR) as a VAT
taxpayer.
As an export enterprise, respondent sells 80% of its products to its mother corporation, the Japan-based Toyo Lens
Corporation, pursuant to an Agreement of Offsetting. The rest are sold to various enterprises doing business in the MEPZ.
Inasmuch as both sales are considered export sales subject to Value-Added Tax (VAT) at 0% rate under Section
106(A)(2)(a) of the National Internal Revenue Code, as amended, respondent filed its quarterly VAT returns from April 1,
1996 to December 31, 1997 showing a total input VAT of P4,462,412.63.
On March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit and
Duty Drawback Center of the Department of Finance, an application for tax credit/refund of VAT paid for the period April 1,
1996 to December 31, 1997 amounting to P4,439,827.21 representing excess VAT input payments.
Respondent, however, did not bother to wait for the Resolution of its claim by the CIR. Instead, on June 26, 1998, it
filed a Petition for Review with the CTA to toll the running of the two-year prescriptive period pursuant to Section 230 of
the Tax Code.
Before the CTA, the respondent posits that as a VAT-registered exporter of goods, it is subject to VAT at the rate of
0% on its export sales that do not result in any output tax. Hence, the unutilized VAT input taxes on its purchases of
goods and services related to such zero-rated activities are available as tax credits or refunds.
The CIR however claims that Cebu toyo was not entitled to a refund or tax credit since: (1) it failed to show that the
tax was erroneously or illegally collected; (2) the taxes paid and collected are presumed to have been made in
accordance with law; and (3) claims for refund are strictly construed against the claimant as these partake of the nature of
tax exemption.
The tax court sustained respondents argument that it was a VAT-registered entity. The CTA also ruled that the
respondents sales to Toyo Lens Corporation and to certain establishments in the Mactan Export Processing Zone were
export sales subject to VAT at 0% rate. It found that the input VAT covered by respondents claim was not applied against
any output VAT. However, the tax court decreed that the petition should nonetheless be denied because of the
respondents failure to present documentary evidence to show that there were foreign currency exchange proceeds from
its export sales. The CTA also observed that respondent failed to submit the approval by Bangko Sentral ng Pilipinas
(BSP) of its Agreement of Offsetting with Toyo Lens Corporation and the certification of constructive inward remittance.
Undaunted, respondent filed on February 21, 2000, a Motion for Reconsideration arguing that: (1) proof of its
inward remittance was not required by law; (2) BSP and BIR regulations do not require BSP approval on its Agreement of
Offsetting nor do they require certification on the amount constructively remitted; (3) it was not legally required to prove
foreign currency payments on the remaining sales to MEPZ enterprises; and (4) it had complied with the substantiation
requirements under Section 106(A)(2)(a) of the Tax Code. Hence, it was entitled to a refund of unutilized VAT input tax.
On May 31, 2000, the tax court partly granted the motion for reconsideration in a Resolution.
In granting partial reconsideration, the tax court found that there was no need for BSP approval of the Agreement of
Offsetting since the same may be categorized as an inter-company open account offset arrangement. Hence, the
respondent need not present proof of foreign currency exchange proceeds from its sales to MEPZ enterprises pursuant to
Section 106(A)(2)(a) of the Tax Code. However, the CTA stressed that respondent must still prove that there was an
actual offsetting of accounts to prove that constructive foreign currency exchange proceeds were inwardly remitted as
required under Section 106(A)(2)(a).
The CTA found that only the amount of Y274,043,858.00 covering respondents sales to Toyo Lens Corporation and
purchases from said mother company for the period August 7, 1996 to August 26, 1997 were actually offset against
respondents related accounts receivable and accounts payable as shown by the Agreement for Offsetting dated August
30, 1997. Resort to the respondents Accounts Receivable and Accounts Payable subsidiary ledgers corroborated the
amount. The tax court also found that out of the total export sales for the period April 1, 1996 to December 31, 1997
amounting to Y700,654,606.15, respondents sales to MEPZ enterprises amounted only to Y136,473,908.05 of said total.
Thus, allocating the input taxes supported by receipts to the export sales, the CTA determined that the refund/credit
amounted to only P2,158,714.46, computed as follows:
Total Input Taxes Claimed by respondent P4,439,827.21
Less: Exceptions made by SGV
a.) 1996 P651,256.17
b.) 1997 104,129.13 755,385.30
Validly Supported Input Taxes P3,684,441.91
Allocation:
Verified Zero-Rated Sales
a.) Toyo Lens Corporation Y274,043,858.00
b.) MEPZ Enterprises 136,473,908.05 Y410,517,766.05
Divided by Total Zero-Rated Sales Y700,654,606.15
Quotient 0.5859
Multiply by Allowable Input Tax P3,684,441.91
Amount Refundable P2,158,714.[52][12]
On June 21, 2000, petitioner Commissioner filed a Motion for Reconsideration arguing that respondent was not
entitled to a refund because as a PEZA-registered enterprise, it was not subject to VAT pursuant to Section 24 of
Republic Act No. 7916, as amended by Rep. Act No. 8748.] Thus, since respondent was not subject to VAT, the
Commissioner contended that the capital goods it purchased must be deemed not used in VAT taxable business and
therefore it was not entitled to refund of input taxes on such capital goods pursuant to Section 4.106-1 of Revenue
Regulations No. 7-95.
Petitioner filed a Motion for Reconsideration on June 21, 2000 based on the following theories: (1) that respondent
being registered with the PEZA as an ecozone enterprise is not subject to VAT pursuant to Sec. 24 of Rep. Act No. 7916;
and (2) since respondents business is not subject to VAT, the capital goods it purchased are considered not used in a
VAT taxable business and therefore is not entitled to a refund of input taxes.
On August 2, 2000, the Court of Tax Appeals denied the petitioners motion for reconsideration. It held that the
grounds relied upon were only raised for the first time and that Section 24 of Rep. Act No. 7916 was not applicable since
respondent has availed of the income tax holiday incentive under Executive Order No. 226 or the Omnibus Investment
Code of 1987 pursuant to Section 23 of Rep. Act No. 7916. The tax court pointed out that E.O. No. 226 granted PEZA-
registered enterprises an exemption from payment of income taxes for 4 or 6 years depending on whether the registration
was as a pioneer or as a non-pioneer enterprise, but subject to other national taxes including VAT.
The petitioner then filed a Petition for Review with the Court of Appeals (CA), docketed as CA-G.R. SP No. 60304,
praying for the reversal of the CTA Resolutions dated May 31, 2000 and August 2, 2000, and reiterating its claim that
respondent is not entitled to a refund of input taxes since it is VAT-exempt.
On July 6, 2001, the appellate court decided CA-G.R. SP No. 60304 in respondents favour.
ISSUE:
I. Whether or NOT RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO
VAT and ENTITLED TO REFUND OF INPUT TAXES PURSUANT TO SECTION 4.103-1 OF REVENUE
REGULATIONS NO. 7-95.
Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is untenable. This
argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act
No. 7916. Note that under said statute, the respondent had two options with respect to its tax burden. It could avail of an
income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not
from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under
P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the
Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from August 7,
1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it
was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered
itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions.
Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent
(10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on
purchases and leases of goods, properties or services.
An exemption means that the sale of goods, properties or services and the use or lease of properties is not subject to
VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the
exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is
not subject to VAT. Thus, a VAT-registered purchaser of goods, properties or services that are VAT-exempt, is not entitled
to any input tax on such purchases despite the issuance of a VAT invoice or receipt.[24]
Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then proceed to
determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that generally, sale of
goods and supply of services performed in the Philippines are taxable at the rate of 10%. However, export sales, or sales
outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered person. Under the value-
added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall
not result in any output tax. However, the input tax on his purchase of goods, properties or services related to such zero-
rated sale shall be available as tax credit or refund.
In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the transaction
completely from VAT previously collected on inputs. It is thus the only true way to ensure that goods are provided free of
VAT. While the zero rating and the exemption are computationally the same, they actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an exempted transaction is not subject to the
output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded while
the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register while registration is optional
for VAT-exempt persons.

In this case, it is undisputed that respondent is engaged in the export business and is registered as a VAT taxpayer
per Certificate of Registration of the BIR.[27] Further, the records show that the respondent is subject to VAT as it availed
of the income tax holiday under E.O. No. 226. Perforce, respondent is subject to VAT at 0% rate and is entitled to a refund
or credit of the unutilized input taxes, which the Court of Tax Appeals computed at P2,158,714.46, but which we findafter
recomputationshould be P2,158,714.52.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated July 6, 2001 of the Court of
Appeals, in CA-G.R. SP No. 60304 is AFFIRMED with very slight modification. Petitioner is hereby ORDERED to
REFUND or, in the alternative, to ISSUE a TAX CREDIT CERTIFICATE in favor of respondent in the amount
of P2,158,714.52 representing unutilized input tax payments. No pronouncement as to costs.
SO ORDERED.